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Not-for-profit hospital sector enjoying balance sheet stabilization

Standard & Poor's Ratings Services is reporting that fiscal 2009 key median ratios for U.S. stand-alone hospitals show improvement in operating metrics compared with 2008 ratios.

In a report on the U.S. not-for-profit hospital sector, S&P indicates “signs of stabilization” at hospitals and overall improvement in balance sheet medians at some rating levels.

Since the rating firm’s 2008 median report, and in response to the broader global economic challenges that began in late 2007, S&P analysts say they have seen management teams at many hospitals focus on tightening expenses and strengthening revenue cycle performance, which has yielded better operating margins in many cases.

The firm believes that, along with more prudent management of capital investments and spending levels, the recovery of the investment and financial markets has helped stabilize balance sheets for many rated stand-alone hospitals. The improvement is reflected in S&P’s rating actions in the first half of 2010, which consisted of fewer downgrades and nearly as many upgrades as downgrades.

The S&P report notes that the timing of each service provider's fiscal year-end affects median ratios. Given the general improvement in the investment markets this past year and service providers' decisions to invest sizable proportions of total investments in the equities markets, the firm thinks that providers with fiscal years ended June 30, 2009, demonstrated a stronger likelihood that investment losses would depress nonoperating earnings.

On the other hand, service providers with a Dec. 31, 2009, fiscal year-end were much more likely to benefit from positive investment returns because they likely experienced their big investment losses in the previous fiscal year.

The timing of hospital audits and investment improvements contributed to the mixed results exhibited in the S&P ratios dependent on investment markets such as excess margin, cash flow, debt service coverage and unrestricted liquidity. But the firm says a review of the ratios for all rated healthcare providers with December fiscal year-ends demonstrated improvement across the board for all ratios.

According to the S&P analysis, over the past decade, strong nonoperating income, growing liquidity and solid operations have been fundamental determinants of stand-alone hospitals' credit strength. However, the firm says the broad-range economic challenges over the past few years have weakened these factors.

Despite some long-term uncertainty – owing to ongoing economic and industry pressures such as weaker volumes, potential state Medicaid funding reductions, capital upkeep needs and the still unknown impact from the passage of the Patient Protection and Affordable Care Act – S&P concludes that many providers are demonstrating improved performance largely due to expense-control measures.

However, the firm questions whether the broader hospital sector, including stand-alone facilities, can sustain these gains.